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What is strategic benchmarking?
Strategic benchmarking: comparing with how other companies compete (not usually industry specific).
What is financial benchmarking?
Financial benchmarking: comparing financial performance with that of competitors.
What is product benchmarking?
Product benchmarking: comparing specific products with those produced by competitors.
Draw the performance prism
Draw Lynch and Cross’s performance pyramid
Draw a single loop feedback system
What is the expected profit arising from the following and what are the problems using expected values in project appraisals?
Outcome I p = 0.3 Profit = 3000
Outcome II p = 0.7 Profit = 5000
0.3 x 3000 + 0.7 x 5000 = 4400
Problems:
How are probabilities estimated
The expected value is usually not ‘expected’
Risk is not captured (eg a poor outcome of 3000 is quite possible in the above case)
What is a data warehouse and data mining?
A data warehouse is a vast collection of historic transaction data (eg, sales by a supermarket).
Data mining is searching though that looking for patterns and associations that might be helpful in increasing profits.
A company produces 20,000 units of Product A. The product is produced in batches of 1,000 units. The company also produces 50,000 units of Product B and this is produced in batches of 5,000 units. Total set-up costs amount to $90,000.
What is the set up cost per unit of Product A and per unit of product B?
Number of set ups = 20,000/1,000 + 50,000/5,000 = 30
Cost per set-up = 90,000/30 = 3,000
For one set-up 1,000 units of A are produced: set-up cost per unit = $3
For one set-up 5,000 units of B are produced: set-up cost per unit = $0.6
What are the main differences between information for strategic decisions and information for operational decisions?
Strategic: often forward looking, highly summarised, often non-routine, estimates, external.
Operational: historical, detailed and very accurate, routine, internal.
Describe what is meant by ‘annuity depreciation’?
The sum of the annual interest charge on the book value of the asset and the annual depreciation is constant throughout the life of the asset. The total annual charge is calculated y dividing the cost of the asset by the appropriate cumulative discount rate.
List eight sources of external information for an organisation
* Competitors’ and suppliers’ catalogues and web sites
* The internet (eg search engines such as Google)
* Newspapers, journals, television, radio
* Published accounts
* The stock exchange
* National and market surveys
* Government and industry statistics
* Discussion with customers
* Government publications
* Employees
* Banks
What are three practical ways of setting a transfer price?
Cost plus
Marginal cost
Market prices
What are three aims of a good transfer price?
* Goal congruence
* Profit for each division (motivation)
* Autonomy for each division (head office specifies only the transfer price and then lets divisions make their own decisions.
What is the ‘rule’ for sensible transfer pricing? For intra-group transfers to occur:
Transferring out company: transfer price must be no lower than marginal cost plus lost contribution of transferring internally
Transferring in company: transfer price must be the lower of net marginal revenue and the outside buy in price.
What additional factors need to be taken into account when international intra-company transfers are taking place?
* Taxation in the different countries
* Import tariffs
* Exchange controls
* Exchange rates
* Anti-dumping legislation
* Competitive pressures
* Repatriation of funds
What is the target costing approach?
* Identify what a product can be sold at (eg by comparing to competitors’ prices).
* Determine the margin required
* Work back to the maximum allowable cost
* Seek to reduce actual production costs to the maximum allowable cost
What are four potential approaches to environmental accounting?
* input / output analysis: record material flows to discover what happens to the material
* flow cost accounting:concentrates more on where material losses are occurring within the business
* environmental activity based costing:to determine what drives/causes costs
* life cycle costing:all costs are taken into account over the product’s life- including costs such as waste disposal.
What methodology is suggested by the six sigma approach for improving quality?
DMAIC: define, measure, analyse, implement, control
In performance measurement systems what is the potential problem with “Ossification”
Ossification: The unwillingness to change a performance measure scheme once it has been set up.
In performance measurement systems what is the potential problem with “Gaming”
Gaming: Deliberate distortion of the measure in order to achieve some strategic advantage.
In performance measurement systems what is the potential problem with “Misrepresentation”?
Misrepresentation: Using creative reporting to suggest that performance measures have been achieved
In performance measurement systems what is the potential problem with “Measure fixation”
Measure fixation: Behaviour and activities in order to achieve specific performance measures, that may not be effective
In performance measurement systems what is the potential problem with “Myopia”
Myopia: Focussing on the short-term resulting in the ignoring of the long-term
In performance measurement systems what is the potential problem with “Sub-optimisation”
Sub-optimisation: Undue focus on some objectives resulting in other objectives not being achieved
Define total quality management
Total quality management: “the continuous improvement in quality, productivity and effectiveness obtained by establishing management responsibility for processes as well as outputs.
In this every process has an identified process owner and every person in an entity operates within a process and contributes to its improvement.”
In performance measurement systems what is the potential problem with “tunnel vision”
Tunnel vision: Undue focus on performance measures to the detriment of other areas
What are the costs associated with quality?
Costs of conformance:
* Prevention
* Appraisal
Costs of non-conformance
* Internal failure costs
* External failure costs
What are six potential problems with performance measurement systems?
* Tunnel vision
* Sub-optimisation
* Myopia
* Measure fixation
* Misrepresentation
* Gaming
* Ossification
Name a quantitative and a qualitative model for predicting corporate failure
Quantitative: Altman’s Z score
Qualitative: Argenti’s A score
What factors are included under the heading of ‘Symptoms’ in Argenti’s A score?
* Financial signs (such as the Z score)
* Creative Accounting
* Non-financial signs (e.g. low morale)
* Terminal signs
What factors are included under the heading of ‘Mistakes’ in Argenti’s A score?
* High gearing
* Overtrading
* Too much reliance on one big project
What factors are included under the heading of ‘Defects’ in Argenti’s A score?
* Chief Executive is an autocrat
* Chief Executive is also the chairman
* Passive board of directors
* Lack of skills balance in the board
* Lack of management depth
* No budgets or budgetary controls
* No cash flow plans
* No costing system
* Poor response to change
What are the three groups of variables that are used in Argenti’s A score for predicting corporate failure?
* Defects
* Mistakes
* Symptoms
What factors should be taken into account when comparing divisional performance?
Many factors could be relevant. Here are some:
* Transfer prices
* Age of assets
* Types of business
* Location of business
* Ability of managers
* Controllability of costs, revenues and investment
* Allocation of head office charges
What are the 3Es used in performance measurement in not-for profit organisations?
* Effectiveness
* Efficiency
* Economy
What are the typical problems with performance measurement in the not-for profit sector?
* Multiple objectives
* The difficulty of measuring outputs
* Financial constraints
* Political, social and legal considerations
* Little market competition and no profit motive.
What are the four perspectives of Kaplan and Norton’s balanced scorecard?
(Present in the proper hierarchy.)
* Financial perspective
* Customer perspective
* Internal business perspective
* Innovation and learning perspective
In respect of assessing performance, what did Fitzgerald and Moon suggest are the components of the building blocks of standards and rewards?
Standards: ownership, achievability, equity
Rewards: clarity, motivation, controllability
In respect of assessing performance, what did Fitzgerald and Moon suggest are the three building blocks?
* Dimensions
* Standards
* Rewards
In respect of assessing performance, what did Fitzgerald and Moon suggest are the six dimensions that should be measured?
* Financial performance
* Competitive performance
* Quality
* Flexibility
* Resource utilisation
* Innovation
What is deducted from NOPAT to give EVA?
Capital employed x WACC. This is a notional charge for the use of capital
In the Economic Value Added approach, list five adjustments that are added back to profit after tax to give NOPAT?
* Non-cash expenses
* Expenses such as R&D, training and advertising
* Provisions
* Book depreciation (replaced by economic depreciation)
* Goodwill written-off/amortised
* Interest on debt capital (after adjusting for tax relief)
In the Economic Value Added approach, if profits after interest and tax are $10 million, interest is $2 million and the tax rate is 25%, what is NOPAT?
Add back the interest after tax ie $1.5 million so NOPAT is $11.5 million
What are the main advantages and disadvantages of using RI as a measure of divisional performance?
Advantages:
* Gives decisions goal congruent with group wishes
* Different rates of interest for divisions of different risks
* Uses readily available accounting figures
Disadvantages:
* Poor for comparing divisions of different sizes
* Profits can be manipulated
* Less intuitive to ROI
What are the main advantages and disadvantages of using ROI as a measure of divisional performance?
Advantages:
* Can be used to compare divisions of different sizes.
* Acceptable/understandable
* Uses readily available accounting figures
Disadvantages:
* Can lead to dysfunctional decisions
* Profits can be manipulated
Define ‘residual income’?
Residual income (RI) is defined as: controllable divisional profit with a deduction of notional (or imputed) interest based on capital employed times cost of capital.
Define ‘return on investment’
Return on investment (ROI) is defined as: controllable divisional profit expressed as a percentage of divisional investment.
What is a cost centre, a profit centre and an investment centre?
Cost centre: manager is responsible for only costs
Profit centre: manager is responsible for costs and revenues
Investment centre: manager is responsible for costs, revenues and investmenr in non-current assets.
What is divisionalisation?
Divisionalisation is where managers of business areas are given a degree of autonomy over decision making i.e. they are given the authority to make decision without reference to senior management. In effect they are allowed to run their part of the business almost as though it were their own company.
What are EBITDA’s strengths and weaknesses?
Earnings before interest and tax: before interest to measure the profitability before any distributions to providers and capital, and before tax because tax is not under direct control of management. EBITDA additionally considers profit before depreciation and amortisation to approximate to cash flow, as depreciation and amortisation are non-cash expenses. A major criticism of EBITDA is that it fails to consider the amounts required for fixed asset replacement.
What is EBITDA?
EBITDA stands for ‘earnings before interest, taxes, depreciation and amortisation’.
Financial performance measurement depends on comparison.
What are the main bases for comparison?
* With previous years for the same company
* With other similar companies
* With industry averages
* Also, possibly, between branches or divisions of the same company
What are the four main categories for financial performance management?
Profitability – how well a company performs, given its asset base
Liquidity – the short term financial position of the company
Gearing – the long-term financial position of the company
Investors ratios – how well investors will appraise the company
Explain negative and positive feedback
Negative feedback is where the control mechanism reduces any deviation from plans.
Positive feedback seeks to increase a deviation form plan. Eg to ensure that sales increases are repeated
Explain feedforward control
Feedforward control is where a problem is identified and corrective action taken, before the problem occurs.
Explain feedback control
Feedback control is where the outputs of a process are measured and information is then provided regarding corrective action, after the outputs have been produced.
Explain maximax, maximin and minimax regret
These are attitudes to uncertainty.
Maximax: an optimist who expects to get the best possible outcome.
Maximin: a pessimist who expects poor outcomes and seeks to limit those.
Minimax regret: someone who looks backwards and often wishes a different choice had been made. Decisions are made to so as to minimise possible regrets.
What is meant by ‘risk preference’?
Risk preference relates to attitude to risk.
A risk seeker will be interested in the best possible outcome, no matter how small the change that they may occur.
Someone who is risk neutral will be concerned with the most likely or ‘average’ outcome.
A risk avoider makes decisions on the basis of the worst possible outcomes that may occur.
What is the difference between ‘risk’ and ‘uncertainty’?
Risk exists where a decision maker has knowledge that several possible outcomes are possible – usually due to past experience. This past experience enables the decision maker to estimate the probability or the likely occurrence of each potential future outcome. Uncertainty exists where the future is unknown and where the decision maker has no past experience on which to base predictions.
What is the contingency approach to management?
The contingency approach to management accounting is based on the idea that there is no universally appropriate accounting system applicable to all organisations in all circumstances.
What is value analysis?
Value analysis tries to reduce costs whilst still delivering the required standard of quality and reliability. The main distinction is between value added and non-value added activities. Value added activities add value to the customer’s perception of a product; non-value added activities do not add value in the eyes of the customer. Costs that do not add value to the product should be targeted for elimination.
What is RFID?
Radio frequency identification (RFID) is the use of a wireless non-contact system that uses radio-frequency communication to transfer data from a tag attached to an object, for the purposes of identification and tracking.
In information systems what do MIS, DSS, EIS, ERP and ES refer to?
MIS = management information system
DSS = decision support system
EIS = executive information system
ERP = enterprise resource planning
ES = expert system
It is sometimes said that information should comply with the acronym ‘ACCURATE’.
What, typically, do these letters stand for?
Accurate,
Complete,
Cost-beneficial,
Understandable/user-targeted,
Relevant,
Adaptable/authoritative,
Timely,
Easy to use.
What are five specific characteristics of service industries?
* perishability
* intangibility
* simulaneity
* heterogeneity
* no transfer of ownership
What are the three levels or categories of business process change?
Automation, rationalisation and business process engineering.
What is business process re-engineering?
Business process reengineering involves re-thinking and radically re-designing of the way an Organisation’s processes operate. It is not simply attempting to improve the existing way of doing things, but starting almost with a blank piece of paper and designing how best to operate the business.
Describe what is meant by the term ‘matrix structure’?
In a matrix structure, each employee has responsibilities to more than one superior.
Eg, in project management an engineer could be responsible to the project manager and to the engineering manager.
What are the main ways in which a business can be divisionalised?
By market and by product
What is the name of the business structure which is organised as accounting, manufacturing, sales, IT etc?
This is a functional structure as it organises the business by function (or department).
What is a span of control and how does it differ between tall narrow and wide flat structures?
The span of control (SoC) is the number of people directly reporting to a manager.
In a tall narrow structure the SoC is low;
In a wide flat structure the SoC is large.
What limits further learning in the learning curve effect?
Practical reasons for the learning effect to cease are:
* When machine efficiency restricts any further improvement.
* A process cannot be speeded up (eg material solidifying)
* The workforce reaches its physical limits.
* If there is a ‘go-slow’ agreement among the workforce.
* Staff turnover
What is the rule governing the operation of learning curves (Wright’s Law)?
As cumulative output doubles, the cumulative average time per unit falls to a given percentage of the previous average time per unit.
What are the necessary conditions for the learning effect to occur?
* There’s a significant manual element in the task being considered.
* The task must be repetitive and fairly complex.
* Production must be at an early stage so that there is room for improvement.
* There must be consistency in the workforce.
* There must not be extensive breaks in production, or workers will ‘forget’ the skill.
* Workforce is motivated and want to improve.
What are three criticisms of traditional budgeting?
* It takes up a lot of management time
* However well the budget is prepared, it rapidly becomes out of date and therefore of less use
* It provides a framework for managers to work to and they are therefore less keen to consider innovations (that may mean overspending the budget in the short-term even if good for the long-term).
What are some of the characteristics of budgeting in a not-for-profit organisation?
* the organisation may be prevented from borrowing funds or from budgeting for a deficit
* the organisation may not be allowed to transfer funds from one budget head to another
* the budgeting tends to be just for one financial year (i.e. short-term rather than long-term)
* incremental budgeting is the method most widely used
How difficult should it be to achieve budget targets?
Targets can assist motivation and appraisal if they are set at the right level.
If they are too difficult then they will demotivate
If they are too easy then managers are less likely to strive for optimal performance
Ideally they should be slightly above the anticipated performance level
What is activity based budgeting’?
This is the application of the idea of Activity Based Costing to the process of budgeting, and as such has particular relevance to budgeting for fixed overheads. At the planning stage, attempts are made to identify which activities drive various overheads. Costs are spread over these cost drivers using whatever basis appears to be appropriate in the circumstances.
What are incremental and zero based budgeting?
Incremental: last year’s budget updated for inflation and any other known changes.
ZBB: critically consider each activity on its own merits and draw up the costs and benefits of the different ways of performing it (and indeed whether or not the activity should continue). Then decide on the most effective way of performing each activity.
What are fixed, flexed, flexible and rolling budgets?
Fixed: prepared at the expected level of activity
Flexed: adjusted or scaled to that level of activity achieved.
Flexible: prepared in advance at several levels of activity
Rolling: always looking a set period ahead – typically one year.
What is meant by the term ‘principal budget factor’?
The principal budget factor limits the activity for the budget period. Normally this is the level of sales and therefore the sales budget is usually the first budget to be prepared – this then leads to the others. However, it could be (for example) a limit on the availability of raw materials that limits activity. In this case raw materials would be the principal budget factor, and this would be the first budget to be prepared.
What is meant by the terms ‘backward integration’ and ‘forward integration’?
Backward integration is taking over (or setting up) a supplier;
Forward integration is taking over (or setting up) a customer or supply chain.
What are the two classes of diversification?
Related and unrelated diversification.
In Ansoff’s matrix, what is selling a new product to an existing market known as?
Product development
In Ansoff’s matrix, what is moving to a new market with an existing product known as?
Market development
What can a company do to increase its profits if it stays with existing products and existing markets?
Market penetration,
Efficiency gains,
Withdrawal, consolidation.
What are the axes of Ansoff’s matrix?
Products (existing and current);
Markets (existing and current)
What are the potential benefits of budgeting?
* Planning
* Co-ordination
* Control
* Authorising and delegating
* Evaluation of performance
* Communicating and motivating
What are the S’s in McKinsey’s 7S model?
* Structure
* Systems
* Strategy
* Style
* Staff
* Skills
* Shared values
What are Porter’s three generic strategies?
* Cost leadership
* Differentiation
* Focus.
What are the support activities of the value chain?
Firm infrastructure,
Human resource management,
Technology development,
Procurement
What are the primary activities of the value chain?
Inbound logistics,
Operations,
Outbound logistics,
Sales and marketing,
Service.
In BCG terms, what is meant by a balanced portfolio of products?
Some cash cows to generate lots of cash (but cash cows are heading towards market decline), and some problem children needing investment. The cash generated by the cash cows can be used to build the problem children into star products that will become the cash cows of the future.
What is the problem with a problem child product or division?
BCG suggests that only companies with large market shares can survive in the long term so the company has to decide whether to withdraw or to invest to achieve a large market share.
Note that niche or focus companies can survive with what looks like a small market share.
What are the four quadrants of a BCG matrix and what market share and growth rates do they have?
Problem child (or question mark): high market growth rate, low market share.
Star: high market growth rate, high market share.
Cash cow: low market growth rate, high market share.
Dog: low market growth rate, low market share.
What are four types of benchmarking?
Internal: for example, to previous periods or between different branches.
External: to similar businesses or organisations. Can be competitive or non-competitive.
Functional: to specific functions in other businesses such as cost per help-line call
Generic: to different businesses and organisations.
What are the two axes on a Boston Consulting Grid?
Market growth rate and relative market share (market share/share of market leader)
What are the characteristics of the market that you would expect to see at the mature stage of a product life cycle?
Fierce competition because the market is not growing. This leads to price pressure and the need to improve specifications to sell to an experienced set of customers. Weaker competitors often drop out and many combine (consolidation) to achieve the economies of scale needed. High profits should be possible for efficient producers (great scale, efficiency and well down the learning curve).
What are the four stages of a typical product life cycle?
* Development,
* Growth,
* Maturity,
* Decline.
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